WEAKNESSES

Location in a region of geopolitical tensions, specifically regarding its proximity to Iran and Iraq

Risk assessment

Growth conditioned by oil prices

Largely dependent on oil market conditions, the economy is expected to expand for the second year running in 2019 on the back of high oil prices. The oil industry (50% of GDP) will remain the primary contributor to the increase in GDP, with 3% growth expected. Increased oil production will also impact external demand by supporting exports. The non-oil sector is expected to grow robustly too, thanks notably to the services sector (especially telecommunications), but also the manufacturing industry. Despite a relatively moderate increase in wages at the end of 2018, private consumption is expected to continue expanding briskly in 2019. Driven by strong household confidence and an employment rate at a four-year high, consumption will benefit the services and automotive sectors. Low inflation, thanks to the decision to postpone the introduction of VAT until 2021 and the fall in rental and food prices, will also support consumption. Easy access to home loans, while diverting spending on consumer goods, should boost household investment. Overall, investment is expected to grow strongly. The increase in oil revenues is making it possible to develop public investment through infrastructure projects. Projects worth almost KWD 10 billion (more than USD 30 billion) are to be financed in 2019, mainly in the construction, water and electricity, and chemicals sectors, and will be conducted through public-private partnerships as the government pursues plans to diversify the economy by strengthening the non-oil sector.

Return to a balanced government primary budget before transfers to the Future Generations Fund

The primary balance, which does not take into account the investment income of the sovereign wealth fund (KIA), is expected to return to balance in the 2019/2020 financial year, after several years of deficit. This balance is largely dependent on oil revenues (and therefore on the price of a barrel), which represent nearly 90% of the state’s total revenues. High prices in 2019 should compensate for the decision to push back the introduction of VAT until 2021. However, the transfer of 10% of oil revenues to the Reserve Fund for Future Generations Fund (RFFG), which constitutes 85% of the KIA fund, is expected to create a post-transfers primary deficit of about 6% of GDP. The latter, which was largely financed by borrowing, mainly external, but also domestic, until the 2017/2018 fiscal year will likely be financed chiefly by drawing on the General Reserve Fund (more than 3% of GDP, backed by a portion of the sovereign wealth fund’s income) in 2019/2020, keeping public debt at a low level. The two main items of government expenditure will again be civil servant salaries (one third of expenditure) and grants (about 25% of expenditure), which should remain at the same nominal level and therefore decrease as a proportion of GDP. Capital expenditure, which represents a lower share, is expected to increase to around 15% of total expenditure, owing to the financing of projects under the Five-Year Development Plan. The largest of these projects will be the new international airport, whose construction, estimated at KWD 400 million, is expected to start in 2019. The overall public balance is largely positive, as it records the investment income of the sovereign wealth fund.

A current account surplus built on oil and investment income

The current account surplus is expected to slightly decline in 2019 from the four-year peak reached in 2018. Elevated oil prices will keep the structural trade surplus high, albeit lower than in 2018, when it was close to a quarter of GDP. Increasing Kuwaiti tourism spendings are expected to widen the services deficit to over 20% of GDP and offset the trade balance. The continued strong current account surplus will therefore be ensured by investment income (around 16% of GDP), which should exceed the largely negative transfer balance, in particular due to remittances from foreign workers (around 11% of GDP) to their home countries. Brisk exports will make it possible to maintain strong foreign exchange reserves (nearly seven months of imports) and ensure the stability of the Kuwaiti dinar, which is pegged to a basket comprising the currencies of the country’s main trading partners.

Powers are concentrated around the royal family

The country is a parliamentary monarchy headed by the Al Sabah royal family. The Parliament is composed of 50 members. The continuing tensions between Parliament and the government appointed by Sheikh Sabah Al-Ahmed Al-Jaber Al-Sabah over the management of public accounts are expected to be exacerbated in 2019 by high oil prices, which are putting the fiscal consolidation policies into question. In addition, Kuwait signed an agreement in late 2018 with India on the situation of expatriate workers. These workers’ living conditions, which have been widely criticised by the international community, should therefore improve in 2019. This will strengthen the country’s diplomatic credibility, which will be useful in its role as a mediator in the conflict between Qatar and Saudi Arabia, Bahrain and the UAE.